Foreclosure Crisis: Stealth Stimulus for Defaulters

While delays in the foreclosure process are costing bond holders and mortgage servicers, defaulting homeowners living in–or even renting out–their homes are getting a pretty tidy subsidy, writes the WSJ’s Mark Whitehouse in today’s paper. That subsidy is worth about $2.6 billion a month, according to a WSJ analysis. That’s .25% of U.S. personal income, roughly equivalent to the benefit top earners receive from Bush-era tax breaks.

Will any of that money find its way back into the economy, as a stealth stimulus? It’s hard to say, writes Mr. Whitehouse. Some defaulters save their mortgage payments in the hopes that a mortgage modification will finally come through, others who have lost their jobs just need the money to keep on going–for food, car payments and the like.

Some defaulters are cashing in by renting out their homes. Joe Mayol, a real-estate agent in Palmdale, Calif., estimates that in his area about two-thirds of houses with defaulted mortgages are occupied, and half of those by renters. “People are getting money out of these houses,” he said.

These kinds of anecdotes are hardly encouraging to those who are keeping up with their payments, writes Mr. Whitehouse. It’s also painful for local governments who are losing out on property taxes.

“I don’t think that’s the kind of recovery we want,” Joseph Carson, director of global economic research at AllianceBernstein in New York is quoted as saying.